–Higher Private Inventories Vs. Initial Estimate Offset Weaker Capex
–Private Consumption Flat, Revised Up to Avoid Slight Drop
–Q2 GDP Expected to Show Rebound on Eased Covid Rules but Exports Slow
By Max Sato
(MaceNews) – Japan’s economic slump in the January-March quarter, reflecting Covid restrictions on consumer spending and a surge in import costs, was revised up slightly as private-sector inventories turned out to be much higher than previously estimated, offsetting the drag from weaker-than-expected business investment in equipment.
The real gross domestic product contracted just 0.1% on quarter, or an annualized 0.5%, in the first quarter, firmer than the initial estimate of a 0.2% drop, or a 1.0% decline on an annualized basis. The revised GDP figures came in stronger than the Mace News median economist forecast of a 0.3% drop on quarter (forecasts ranged from minus 0.3% to minus 0.1%), or at an annualized 1.1% (minus 1.4% to minus 0.5%).
The economy grew 1.0% (revised up from 0.9%), or an annualized 4.0% (revised from 3.8%), in the final quarter of 2021, when the government lifted Covid restrictions before the Omicron variant wreaked havoc in the New Year and easing parts supply constraints supported auto production and shipments.
In January-March, domestic demand showed some resilience, raising total domestic output by 0.3 percentage point (revised up from the initial estimate of plus 0.2 point), partially offsetting a negative 0.4-point contribution made by net exports. Consumption was flat, instead of falling slightly, but most of the upward revision came from a buildup in work-in-progress inventories and a smaller drawdown in distribution stock amid lingering supply constraints.
Looking ahead, economists expect private consumption, which avoided a decline in the first quarter, will lead a rebound in the April-June quarter GDP now that the government ended on March 21 its strict Covid rules which had been in place since late January.
The Bank of Japan’s Consumption Activity Index data released Tuesday showed that the supply-side index made a modest start to the second quarter, rising a real 0.8% on the month on a seasonally adjusted basis, after marking the first gain in four months in March with a 2.9% jump. It was up 2.1% on the January-March quarter.
On average, 36 economists polled by the Japan Center for Economic Research from April 28 to May 11 forecast the GDP would rebound a sharp 5.18% at an annualized pace in the April-June quarter based on their average estimate that the economy slumped 1.36% in previous three-month period, according to the center’s ESP Forecast released last month.
Consumption Flat with Positive Bias, Capex Revised Down Sharply
Private consumption, which accounts for about 55% of GDP, was flat in the first quarter but revised up slightly to plus 0.0% on quarter from minus 0.0%, following a sharp 2.5% rebound in the fourth quarter and a revised 1.1% slip in the third quarter. It made zero contribution with a positive bias (0.0 percentage point) to the GDP, instead of a negative bias (minus 0.0 point) as reported last month. Consumption added 1.3 points to the total domestic output in the previous quarter.
The government urged many prefectures to adopt strict anti-Covid measures short of a state of emergency for about two months until March 21. People were cautious about dining out. Domestic leisure travel didn’t start to pick up until late March to early April. Some data have indicated people are eating out and traveling more freely in the second quarter.
The quarter-on-quarter change in business investment in equipment was revised down sharply to a 0.7% decline from a 0.5% increase. Economists had expected a smaller downward revision to a 0.3% rise, judging from the results of a quarterly business survey conducted by the Ministry of Finance. Capex now posted the first quarterly drop in two months after a downwardly revised 0.1% rise in October-December and a 2.4% slump in July-September, pushing down the January-March GDP by 0.1 percentage point, instead of pushing it up by 0.1 points as seen in the initial estimate. Its positive 0.1-point contribution in October-December was revised down to zero.
The demand-side survey by the MOF released last week showed that combined capital investment by non-financial Japanese companies rose 3.0% on year in the January-March quarter, decelerating from a 4.3% increase in October-December. On quarter, combined capital outlays edged up a seasonally adjusted 0.3% for the second straight quarter-on-quarter increase but its pace slowed from a 3.1% rise in the previous quarter.
There is solid demand for upgrading computer software and machines for digitizing and automating operations as well as a move toward reducing emissions, but some firms appear to be cautious as the global growth outlook has been clouded by the Ukraine war and supply constraints.
Net Exports Unrevised, Down on Import Surge
No revision was made to the negative contribution of external demand. Net exports of goods and services – exports minus imports – pushed down the total domestic output by 0.4 percentage point in the first quarter after pushing up the fourth quarter GDP by 0.1 point. It was the first negative contribution in three quarters.
Exports of goods and services rose an unrevised 1.1% on quarter in January-March, posting the second straight quarterly gain after rising 0.9% in October-December. Imports rose at a much faster pace of 3.3% (revised from 3.4%) after rising 0.3% the previous quarter, reflecting higher energy and commodities prices and the need to purchase more Covid-19 vaccines from the US and Europe.
The Bank of Japan’s real export index rose a seasonally adjusted 2.3% (revised from 2.2%) on quarter in January-March for the first rise in three quarters, recovering from decreases of 0.1% in October-December and 1.9% in July-September. A decline in capital goods shipments amid uncertainty caused by the Ukraine war was more than offset by a pickup in auto and auto parts shipments as well as solid demand for computers, semiconductors and other information technology goods.
Looking ahead, however, the bank’s real export index plunged 6.0% on the month in April after rising 0.6% in March, which was down 5.2% on the first quarter. The export volume index calculated by the Cabinet Office fell a seasonally adjusted 3.1% on the month in April after being flat (minus 0.0%) in March and rising 1.6% in February.
In addition, elevated costs of importing energy and commodities are showing no signs of easing and the yen remains weak against the dollar while Japan is still very cautious about allowing tourists from other countries (inbound demand is counted as an export). Those factors are likely to weigh on net exports in the second quarter.
Private Inventories Up, Public Works Drop Seen Revised Down
Private sector inventories provided a positive 0.5 percentage point contribution to the January-March GDP, revised up sharply from a preliminary plus 0.2 point and coming in stronger than the median economist forecast of plus 0.3 point (forecasts ranged from plus 0.2 to 0.4 point). This category trimmed the fourth quarter GDP by a 0.1 point (revised from minus 0.2 point).
The quarter-on-quarter decline in public works spending was revised down to an as-expected 3.9% drop in the first quarter from the initial reading of a 3.6% fall. It was the fifth consecutive decline after a 4.7% slump in the fourth quarter amid construction worker shortages and surging materials costs. It pushed down the GDP by 0.2 percentage point after providing a negative 0.3-point contribution in the previous quarter.
The government has been focused more on purchasing Covid-19 vaccines, which falls into the public consumption category (up a revised 0.5% on quarter).